Earnings Call Transcript - MPTI Q4 2024

Operator, Operator

Thank you for joining us. I am Kathleen, your conference operator today. I would like to welcome everyone to the M-tron Investor Update. Now, I will turn the call over to Mr. Cameron Pforr, Interim CEO. Please proceed.

Cameron Pforr, Interim CEO

Thank you, Kathleen, and good morning, everyone. Thank you for attending our investor update this morning. We're pleased to speak to you about our preliminary earnings release for Q4, and also the preliminary annual results for 2024. We did post those last night to the SEC and an 8-K and put out a press release on that. So hopefully, you all have a copy of that. Just a note, we do expect to file our 10-K with our audited results on or about March 26 or 27, so later next month, but we are very far down our audit process and don't expect substantial changes. So for those of you who don't know me, my name is Cameron Pforr. I joined M-tron this past September. I was recently named Interim CEO, having served over the past several months as CFO. And just a little bit of background, I have 30 years of experience in technology company management advisory roles. I spent the last 15 years running companies from startups with less than $1 million to software companies with over $100 million. Two of those companies we sold, one to Cisco, one to Red Hat, and returned significant returns to investors. I also have a lot of combined corporate finance and M&A experience as an investment banker and an adviser to many companies. So I have raised about $12 billion in equity and executed on over 30 acquisitions and hope to bring some of that experience here as we move forward. Today, we're going to give you an update on the health of the business, talk about the direction we're taking, and answer any questions you have about the business and our recent announcements about the rights offering. This morning, we announced we are going to shift gears there and move towards a dividend warrant. The goal there is really to distribute value to our shareholders in a fair and equitable way. We've refined how we're doing that, and I think this is probably a better tool to achieve that. I’m pleased to be joined this morning by Linda Biles, our EVP of Finance and Chief Accounting Officer. Linda, if you can please introduce yourself and go through the safe harbor statement? I appreciate that.

Linda Biles, EVP of Finance & Chief Accounting Officer

Good morning. I'm Linda Biles. I'd like to go over our safe harbor with you. Information included or incorporated by reference in this presentation may contain forward-looking statements. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of words such as may, should, expect, anticipate, estimate, believe, intend, or project or the negative of these words or other variations. Examples of forward-looking statements include, but are not limited to, statements regarding our revenue efforts, expectations regarding fulfillment of backlog, future benefits to operating margins, and the adequacy of cash resources. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including without limitation, the risks outlined under Risk Factors in the information statement contained within our Form 10-K filed with the SEC on March 25, 2024. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this presentation will indeed be accurate. Further, we do not undertake any obligation to publicly update any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements. With that, I'd like to turn it back over to Cameron.

Cameron Pforr, Interim CEO

Yes. Thank you, Linda. I'm going to start the presentation with the MPTI overview slide, which you should all have from our website. I wanted to give you a brief update on the company for those of you on the call that are new to it. We were formed in 1965 and listed on the New York American Exchange in October of 2022. We have been focused on the aerospace and defense market since the acquisition of PTI in 2004. There was a significant shift in the business not in terms of products, but in the markets that we pursued. Today, we're an American-made defense contractor specializing in robust, engineered frequency timing control and filter applications. We have about 2.9 million shares outstanding and enjoy broad employee ownership. At the end of 2023, we distributed 183,000 options to our valued employees based on their tenure with the company, really to reward their contributions over the years. We're pleased they are shareholders as well and strong believers in what we do. We are well positioned to continue to access long-term value creation opportunities. If we move to the next slide, some key takeaways to share. We continue to perform well and announced our preliminary earnings for Q4 in the 2024 annual period last night. We have a unique American story, founded in 1965 with tremendous engineering skills and capabilities. It has been built over the years to serve our nation's defense sector and other key markets, such as avionics, space and satellites, and the commercial sector. We play a significant role in the telecom area and also in test and measurements. We are vertically integrated with the capability to start with raw crystals and complete the process to produce finished oscillators and filters. We are one of the only companies in the market that supplies both oscillators and filters. The manufacturing process uses CNC machining and surface mount assembly with a full suite of test and screening capabilities to ensure robust designs and high-quality products. The production of these components and subsystems is designed to meet high tolerance markets, as much an art as a science, leveraging our skilled workforce based in Orlando, Florida; Yankton, South Dakota; and Mumbai, India for assembly. We appreciate their hard work and diligence. We have a global customer base, including many industry leaders in key markets. Most of our customers have been with us for over ten years. Just at the end of 2024, we announced two significant contract wins, each over $10 million. One was received just in the last days of 2024, and the second at the very beginning of 2024. This strengthens our pipeline, and we expect several other large contracts like that to come through in the next quarter or two. The momentum continues for the business as we supply many key defense programs for both the United States and our allies, including precision-guided munitions, communications, radar, electronic warfare, drones, UAVs, and space and satellite applications. Despite the recent discussions regarding potential defense cuts in Washington, we have seen no slowdown in customer engagement or our sales processes; all remain on track. We expect bookings and revenue in the coming few years to remain strong, driven primarily by replenishment of U.S. stockpiles and expected increases in European defense spending. European defense stocks are significantly up, and most European countries spend over 60% of their defense procurement budgets acquiring supplies from U.S. defense vendors. The Pentagon has been explicit about preserving key programs from any budget decrease discussions, especially in areas where we play a significant role, such as air defense systems, precision munitions, missile programs, autonomous vehicles, drones, UAVs, and some surface ships. These areas represent key growth priorities for us. With the resolution of the strike discussions at Boeing, we expect to fulfill large backlogs of Airbus airframes through 2041. From what we are hearing, 80% of airframes will be replaced during that timeframe. We anticipate strong tailwinds in this area. Regarding margins, our gross margins remain robust around 40% for the quarter and over 46% for the year, reflecting a 1,000 basis point increase over the past three years. We are achieving more leverage through our model, thereby increasing our cash flow. We ended 2024 with a solid balance sheet and expect our cash to accumulate significantly throughout this fiscal year, with remaining options potentially adding about $3.6 million of cash if exercised this year. Our core business remains strong, and we plan to invest more in partnerships and acquisitions for inorganic growth. Additionally, we discussed in our recent press release about an investment in a group called Connectivity Partnership, focusing on RF communications companies across various sectors that we currently do not participate in. This will open new market opportunities, and you can expect announcements detailing our progress along these lines in the next couple of quarters. We seek to expand our product portfolio, gain new customers, and consistently grow our EBITDA and EPS for our shareholders. When it comes to acquisitions, we are looking for accretive transactions where MPTI can add value to a combined entity with our strong sales network, manufacturing capabilities, or engineering talent. The goal is to acquire companies that can quickly align with our margin profile. Given the significant fixed transaction costs and the time it takes from our team for integration and due diligence, we aim for transactions that will meaningfully contribute to our EBITDA. We are now in a position to generate cash and expect to drive earnings through long-term contracts and loyal customers in attractive large end markets. Our aerospace and defense segment, which represents close to 70% of the business this past year, is program-driven. This allows us to weather budget fluctuations during periods of late budget approvals and benefit from continuing resolutions that can support further purchases of our products. Programs of record typically last five to twenty-five years in the defense sector. A great example is the ongoing effectiveness of the Patriot missile system, which had a redesign but has been granted an extension without modification. That program will sustain for over 25 years. We believe we have compelling financials from the organic growth demonstrated, and we're keen on an inorganic growth strategy to complement this. Lastly, we feature a strong management team, including Linda, alongside Bill Drafts, who I believe will join our next call for the 10-K earnings release in March. Both have long tenures with the company and possess a comprehensive understanding of our operations, ensuring robust support for our employees and shareholders. Next, I’d like to discuss our M&A strategy and partnership opportunities. We focus on enhancing our market position through acquisitions and product expansions or entering new markets or gaining key customers. Our organic growth contributes here, with over 30% of our revenues coming from new products developed in recent years. Additionally, we continue hiring engineers to assist in market penetration. The ideal companies we seek have moderate to strong revenue growth with positive cash flow. They should fill technology gaps, bring in new customers or end markets, and support our goal of moving toward solution sales. We are actively seeking firms that align with our established operations to expedite their traction. Our interest also extends to RF amplifiers, mixers, phase shifters, and other technologies that augment our portfolio. We look for companies with existing revenues that have potential room for improvement, ideally generating around $2 million to $5 million in EBITDA. We are a publicly listed company, providing significant flexibility to finance acquisitions. We can utilize our accumulating cash, borrow funds, issue shares to target shareholders, or raise capital from current investors. We prefer to enhance returns for existing shareholders first. We completed a strategic review of acquisition targets and recognized others in the marketplace interested in going public, utilizing our listing as a liquidity platform. If there are meaningful returns to shareholders, we would be open to this type of involvement. Ultimately, our goal is to double or triple our size in the next few years by expanding market presence and product offerings – thus driving growth in earnings. Now, I want to address the recent rights offering announcement and our decision to initiate a warrant dividend. Many of you are familiar with the rights offering. Our aim is to distribute value to shareholders, acknowledging that we are generating cash that can enhance business growth. We appreciate your investment, and we want to reward you for it. Given market volatility and stakeholder feedback, we decided to explore alternative methods. Thus, we are now implementing a warrant dividend instead of the rights offering. Essentially, the warrant dividend grants every record shareholder the right to buy additional shares. For every five warrants, you will have the option to purchase one share of common stock. The warrant dividend will remain open for three years post-declaration, with a strike price of $47.50. If during this timeframe, our stock trades consistently into the $50s, with a 30-day VWAP at $52 or greater, the warrants may trigger early. This structure is designed to offer shareholders flexibility in participating in our growth, whether through exercising warrants or selling them. We will announce a record date soon to further clarify this process. I wanted to provide this update to all of you here on the call. Now, let's open the floor for questions.

Operator, Operator

Your first question comes from Anja Soderstrom of Sidoti & Company. You may proceed.

Anja Soderstrom, Analyst

Hi and thank you for taking my questions. Congrats on the nice progress here. Regarding this capital raise and the cancellation of warrants, is there something imminent in terms of M&A? What are you seeing in the M&A market?

Cameron Pforr, Interim CEO

Thank you, Anja. No, there’s not an imminent deal we’ll announce soon, but we’re seeing a lot of opportunities. The goal was to distribute value to shareholders while also considering how raising capital can bolster our balance sheet to facilitate larger acquisitions. So some of those opportunities may include joint ventures, partnerships, or acquisitions.

Anja Soderstrom, Analyst

Regarding those large contract wins, are they with the same customers or different ones? What can you tell us about upcoming sizeable contracts?

Cameron Pforr, Interim CEO

These were with two different customers—two of our larger clients. We expect to announce more contracts in the next few months, covering various clients in the avionics and aerospace defense sectors.

Anja Soderstrom, Analyst

How will the connectivity partnership work? Could that assist in sourcing acquisition deals?

Cameron Pforr, Interim CEO

The Connectivity Partnership has been discussed for several months. It aims to tap into a large market opportunity, establishing a team of seasoned investors and operators knowledgeable in the field. They’ll provide us insight into markets where RF connectivity plays a role, allowing us to partner with or invest in companies that may not have reached our radar. This relationship will ideally yield good returns and valuable acquisition opportunities, enhancing growth for both entities.

Anja Soderstrom, Analyst

With strong revenue growth anticipated and a solid backlog, do you expect growth to be at a similar magnitude as the near 20% observed previously?

Cameron Pforr, Interim CEO

We’re guiding towards lower figures around 10%. We desire to grow more, but external factors make it prudent to stick with estimated projections for now.

Anja Soderstrom, Analyst

What’s the long-term outlook for gross margins? How should we interpret that from product mix?

Cameron Pforr, Interim CEO

I expect margins will remain in the high 40s. There may be variability quarter to quarter, but within a reasonable range of 45% to 48%. Overall, margins should stay stable.

Anja Soderstrom, Analyst

Thank you.

Cameron Pforr, Interim CEO

Thank you.

Operator, Operator

Your next question comes from Asset Management. Your line is now open.

Unidentified Analyst, Analyst

Good morning. Can you provide context about the connectivity partnership, such as the funding committed and expected fund size? Also, is this where your former CEO is taking a senior advisory role?

Cameron Pforr, Interim CEO

The fund is being established, currently in the market for investments. They aim to raise about $200 million to $250 million. We are looking to be part of the GP and gain some benefits from the performance on those investments. The exact size of our investments isn't determined yet, but we want to explore opportunities early on.

Unidentified Analyst, Analyst

Could this fund potentially compete with your own M&A activities?

Cameron Pforr, Interim CEO

That's a valid point. We're collaborating to ensure delineation in our objectives and establish a right of first refusal for pertinent acquisitions. Our aim is to avoid competition and handle prospective targets based on our core business interests.

Unidentified Analyst, Analyst

Can you discuss the metrics for accretive acquisitions? What timeframe do you consider for them to be accretive?

Cameron Pforr, Interim CEO

Accretive deals are judged on an EBITDA-to-EBITDA basis, and we aim for immediate accretiveness, avoiding speculative technologies. We target companies generating at least a couple million in EBITDA while being cautious not to hinder our margins.

Unidentified Analyst, Analyst

Regarding your incentives, how are senior team members rewarded? Are these incentives linked to stock performance?

Cameron Pforr, Interim CEO

Salaries and cash performance bonuses drive senior team incentives based on company performance. Additionally, restricted stock grants vest over three years, aligning us as equity holders. While performance isn't stock-based, I believe bonus structures should be more equity-focused to align longer-term interests with shareholders.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

That concludes our Q&A session. I will turn the conference back to Mr. Cameron Pforr for closing remarks.

Cameron Pforr, Interim CEO

Thank you very much for joining the call today and for your interest in the company. I hope today clarified questions arising from recent press releases. We are committed to providing shareholder value, and the warrant dividend serves as one strategy, acknowledging earlier issues with the rights offering. I appreciate your support and the mission of our company. A special thank you to all employees for their dedication. Thank you for your time.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.